How is it different to take a loan from your 401k versus cashing it out?

Question

If I take what is called a loan from my 401k when do I pay the tax burden?

Answer 1

If you cash out, you are subject to federal and state taxes plus a 10% penalty on the total cashed out.

If you take a loan, you make payments (principle + interest) back to your 401k account. It's not subject to penalties or taxes. If you default on the loan back to your account, then you will be subject to the taxes and penalties stated above.

Answer 2

If you cash it out you pay a 10% early withdraw penalty, and then you have to pay regular income tax on top of that. With a loan there is no penalty and no tax impact. Although the payroll deduction for a 401K loan is made after taxes are deducted.

Answer 3

You don't have to. That's a difference between the loan and cashing it out. With the loan, all you have to do is pay it back, generally at an interest rate of prime plus 1 or 2.

Answer 4

You will face a 10% penalty, the money that you take will be taxable (contributions were not taxed) and they will withhold 20% for taxes. I would look at getting a loan. Talk to your 401k Administrator before you do anything.

Answer 5

If you repay the loan on time, there is no tax burden (until you eventually withdraw the money later).

If you fail to do so or you lose the job, then the unpaid loan is becomes a distribution and you pay tax and a 10% penalty at that time.

Answer 6

There is no tax bill from a loan from a 401k because you have to pay it back.

Answer 7

If you take a loan you are not penalized, if you cash out you have to pay almost half of it back in taxes unless you roll it over into a new fund and can prove you did so.

Answer 8

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